On Jan. 17, the U.S.-listed shares of Carnival (NYSE:CCL, NYSE:CUK) closed just below $52. On Monday afternoon, CCL stock traded below $22.
It’s a staggering decline — almost 60% in less than eight weeks. And at these lows, CCL stock looks absurdly cheap (CUK is even cheaper). Shares trade at roughly 5x fiscal 2019 (ending November) adjusted earnings per share. The Carnival dividend now yields over 9%.
For investors who believe the coronavirus from China will fade, and U.S. equities will rebound, Carnival seems like an attractive “buy the dip” opportunity. Those fundamentals look just too cheap.
I’m one of those investors who believe this market-wide selloff has gone too far. But I’m not one of those investors who wants to own CCL stock as a result. At least, not yet.
The Case for CCL Stock
The simple case for CCL stock is that panic selling has created a buying opportunity. Negative headlines surrounding cruise ships, including the Grand Princess, owned by a Carnival subsidiary, have forced customers to cancel their trips and investors to sell their shares. A U.S. Department of State bulletin Monday advising U.S. citizens to avoid cruise ships only made matters worse.
But these negative developments aren’t the death knell for Carnival or for the industry.
Yes, the company will lose money. Refunds for the Grand Princess alone will run into the millions of dollars. The impact to CCL stock isn’t in the millions, however. Carnival has lost close to a staggering $20 billion in market capitalization just since mid-January.
That figure is almost equal to the company’s entire revenue for fiscal 2019. Put another way, the drop in Carnival stock only really makes sense if the company was forced to operate its cruises for free for an entire year.
Obviously, that’s not going to happen. In fact, the company said on Feb. 12 that full suspension of its operations in Asia through April would cut full-year EPS by 55 cents to 65 cents. That’s a little over $400 million in lost after-tax income.
With suspensions now likely to expand further and last longer, the hit will be larger. But, again, the $20 billion haircut seems to price in years of pain for Carnival across the globe. Contrarians would argue that’s not a likely scenario.
Take the Long View
I’m not sure the long-term case is quite so simple, however, for a few reasons.
The first is that there is going to be a long-term impact to the cruise business for years to come. There’s pretty much zero chance that this coronavirus scare is going to blow over in a matter of days. Equity markets are triggering circuit breakers. Consumers are clearing out Costco (NASDAQ:COST) of toilet paper and hand sanitizer.
This panic will end. But the memories will linger. It’s going to take time for customers to be completely comfortable with cruise ships again after hearing horror stories about weeks-long quarantines.
The second reason for caution is that the coronavirus may well have an economic impact. And that itself is a problem for cruise lines. In a recession, or even just a macroeconomic slowdown, consumers’ belts tighten. Carnival’s business in Asia and Europe, in particular, is going to take a huge hit. There’s some cost to the equity here simply from macro weakness irrespective of pandemic fears.
The final reason for long-term caution is that it’s not as if Carnival stock was roaring along until late January. CCL stock declined steadily across 2018 and most of 2019. It opened 2020 below where it began 2016. Earnings growth had basically stalled out, with increases in adjusted EPS in FY19 and FY20 coming mostly from share repurchases.
There was a case before January that CCL stock was a value trap that wasn’t properly pricing in downside risk. That has to be considered as well.
The Short-Term Risk
Meanwhile, from a short-term perspective, there’s a simple problem. CCL is a falling knife and is very dangerous to catch. Indeed, it was less than two weeks ago that the entire sector managed to catch a bid. That proved only to be a “dead cat bounce.” Investors trying to time this bottom run the risk of making the same mistake.
At the same time, it’s likely there’s more bad news on the way. It’s possible that at some point this spring or summer Carnival simply isn’t operating any of its ships. Buying CCL stock ahead of that point seems foolhardy.
So there’s just no reason to rush in here. Consider an admittedly imperfect example: Chipotle Mexican Grill (NYSE:CMG).
Its stock plunged amid an E. coli outbreak in late 2015. By the next year, all seemed quiet — but the stock would prove to have another leg down. Shares would fall almost another 50% before an early 2018 bottom.
Long-term investors in CMG made out well. But those who were patient did even better. Even though the two situations are not identical, I wouldn’t be stunned to see something similar play out with Carnival stock.
Stay Patient and Keep Your Eyes Open
In the meantime, there are other options out there in this panicked market. Plenty of quality names have become cheaper, if not as cheap as CCL stock.
Airline stocks too have plunged. We’ve seen indiscriminate selling in a cannabis sector that already had been hammered by short-term thinking. A quality name like Nvidia (NASDAQ:NVDA) has seen a 20% pullback. China growth bulls can and should pick up Luckin Coffee (NASDAQ:LK) off its highs.
The volatility in this market is creating opportunities and will create still more. But the best way to take advantage is to focus on quality and avoid chasing bottoms.
For now, CCL has too much risk, in terms of both its business and its trading. That will change at some point for patient investors.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
